How to use existing home as income to get new mortgage.

15 Replies

Hello everyone, my name is Tenzin I have a high ranch house in Suffolk co NY without any mortgage.. I am a stay home mother and my husband has started a new company beginning of this year, he is very busy and doing great but we are unable to get conventional mortgage. What is the best way to get a mortgage we can put down upto 40% down for a 300,000 house. Thanks

Unfortunately even if you area able to rent your existing house, most lenders will ignore that rent.  So you will need to qualify for both mortgages from existing, documented income.  That may be tough with a new self-employed business.

You could try looking for creative deals offering some sort of owner financing.  Some of these are really slanted toward the seller, so be very careful.

What about selling your current house?

For a free and clear home you could look at an installment sale, creating a new private first mortgage.

I would use a RMLO (Reg Mortg Loan Originator) in NY and make it Dodd Frank compliant.

Or a lease with option.

Or outright cash sale (fsbo or agent).

Can she not leverage the equity she has in her paid off home to buy a new one? 

Thank you everyone for advise, I am looking to buy more houses not wanting to sell the existing one.. It has legal apartment downstairs. I will look into RMLO thank you again everyone for your valuable time and advice.

Originally posted by @Tenzin Yangzom:

Thank you everyone for advise, I am looking to buy more houses not wanting to sell the existing one.. It has legal apartment downstairs. I will look into RMLO thank you again everyone for your valuable time and advice.

 HI Tenzin,

It is true that you cannot use roommate income or what lenders call "boarder income," from your primary unless if its a legally zoned multi-unit property like a duplex, triplex, or fourplex. In the case of 2-4 unit you can use 75% of the other legally zoned/permitted units gross incomes to help qualify for other liabilities or properties. This applies to conventional financing however on FHA financing you "can," use boarder/roommate income. It all depends on your type of financing and how you structure your file. I suggest you find an expert to strategize with in this regard.

If you have a qualifying credit score (min 620 + ) and you have the min down payment you can qualify for a conventional fannie mae non owner occupied home with the assumption that this formula results in a positive number (below):

75% of potential gross income - PITIA (principal/interest/taxes/insurance/assessments) = positive number

The above also assumes you have $0 dollars of liability as well in monthly obligations (credit cards, lines of credit, other mortgages, etc).

I've checked with my head underwriters on this and have done loans for people who had no earned/working/self employed income or were not even employed at all. Fannie Mae will allow the use of rental income immediately and no documentation of 2 year of landlord experience via CPA letter or tax return is required. Loans positioned to be sold to Freddie Mac or banks sometimes have a 2 year requirement so its important to keep note that not all direct lenders can use rental income immediately it depends on the options the bank has to sell their notes on the secondary market and the risk tolerance of that particular lending institution to allow use of rental income immediately.

Example:

You find home for 100,000

Your mortgage after 20% down is 400 dollars

Taxes and Insurance are 200 per month

gross rents are 1000 per month

75% of 1000 gross rents is 750 income - 400 mtg - 200 Tax/Ins = 150 positive income for qualifying purposes

Since you have positive income, from a lenders perspective this is viewed as an income producing asset and it "adds," to your qualifying scenario. As long as you buy right you could potentially build your qualifying income with out having to work assuming you have enough capital to parlay (10 max financed properties available per borrower).

Hopefully that helped. Let me know if you have any questions.

A few more ways.

Renting a room.
Leveraging to release equity and investing in Buy to let.
Renting car parking
Renting storage

Originally posted by @Atchut Neelam:

A few more ways.

Renting a room.
Leveraging to release equity and investing in Buy to let.
Renting car parking
Renting storage

This may help from a "real world," or cash perspective but from a residential lending perspective you cannot use boarder or roommate income (unless if its FHA or if the person providing income is a assisted living person to help take care of you for medical purposes).

On leveraging to released equity, she doesnt have any income to borrow and to obtain a loan or HELOC you'll need documentable income to do so in most cases with banks.

Renting a car parking spot or storage - this creates daily/monthly cash flow but no lender I know of will let you use miscellaneous income from your primary residence to qualify. However, not saying its impossible if its filed correctly on your tax return via schedule C, or miscellaneous interest income and you have a 2 year track record of this on your taxes it could be used...

@Albert Bui  just to clarify, you're saying that Fannie has been known to actually take a mortgage, even if you don't have regular W-2 income, so long as the gross rents will cover PITIA?

(e.g., if someone is a 1099 contractor for one year, is there still a chance they would qualify, assuming the property meets the above requirements?)

Originally posted by @Will Porter:

@Albert Bui just to clarify, you're saying that Fannie has been known to actually take a mortgage, even if you don't have regular W-2 income, so long as the gross rents will cover PITIA?

(e.g., if someone is a 1099 contractor for one year, is there still a chance they would qualify, assuming the property meets the above requirements?)

 HI Will,

Yes Fannie will allow this as long as the above formula pencils out as positive income because in their eyes the mortgage and property expense obligations have been delegated to be paid by the tenant in addition to hopefully generating you some positive cash flow as well. They've (Fannie) also reduced their risk by factoring in 25% of expenses which doesn't account for taxes and insurance either because when you take 75% of gross rents you're still subtracting it from principal and interest, taxes, insurance, and assessments through the "PITIA."

I also think your question pertains to self employment which which requires min 2 year history of time in the industry and atleast 2 years of tax documentation to qualify with fannie mae however freddie will allow you to use 1 year self employment income (most recent tax return) but the only down side to freddie mac is the 2 year requirement to use rental income to offset PITIA.

So they both have their strategic advantages in the planning of investor and primary home loan transactions.

If those two conventional loan sources are not feasible then there are always portfolio loan options as well but conventional is the least expensive option so investors will tend to obtain as much 30 year fixed cheap money as possible.

Thank u everyone for the response and your advice. As u all know I bought a high ranch on 2012 with cash.
November of this year I bought another high ranch with cash, did new kitchen bath floor and walls, I have a tenant waiting to move in on January. They are going move with their mom downstairs to help watch their kids. I am getting rent 2600 plus utility.
I paid 135K for the house and 30K for rehab. Well I want to buy another house but I can't afford to buy another house cash, so what's the best way to get another rental house. Thank u again in advanced,

@Tenzin Yangzom  

You may be able to do some thing called "cross collateralizing" I have done this quite successfully several times in the past.

This is how it works:

     When you have rental properties with lots of equities, and would like to by more, you can normally obtain a commercial mortgage (only about a 1% more than mortgage for owner occupied property)  from one of your local bank (SMALL BANK with only few branches)  for about 75% of the value of the property.

      They will tell you need to have a 25% down payment, that is when you can tell them you have substantial portion of your investment portfolio in home equities. And you were wondering if they would cross collateralize your 25% down payment from another investment property you owe free and clear! This mean they will secure a "second" mortgage from another property you already owe.

      This does not mean how ever that you have to make payment on that note. It is just extra security for the bank Let me explain:

This will work IF buy the second property for 70% of the appraised value. That way the first mortgage you are getting will cover the purchase price so you can pay the seller his/her sale price in full from the first mortgage.

As a savvy investor you should buy it right any way!

This is a Win-Win-Win

-you win because you are buying a property  for 70 cents on the dollar with no money down!

-the bank wins because they sell you a VERY LOW risk loan with terrific equity position.

-seller wins because you take the property off their hands.  

    

     Will this work with any bank? No but you need to build relationships if you are planning to grow your investment business anyway! I had tried about 3 banks in my area (when I was starting out) and the third one said yes.

Even if they say no don't get discouraged just ask them why it was no. Sometime it will be as simple as wait six months so you have owned your properties for at least 12 months, 18 months etc........

If I was in  your situation i would definitely take this route, you should  be able to buy many more rentals, as after the first one the banks will take you even more seriously.

Good Luck! :)

I would just like to say congrats on owning two homes free and clear!  I don't know what a 'high ranch' is, but it sounds nice.  If your goal is to continue buying, maybe finance a % of your future  purchases so you aren't caught trying to access leverage later.  Congrats, @Tenzin Yangzom  .  Please share a little bit about how you came up with enough cash to buy outright in the first place!

Thank you Val. I am going to call few bank first thing in the morning. I've already talked to few banks before but they said I need to show two years tax return on the investment property or W2

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Thank you Steve,
High ranch is two story with accessories apartment downstairs. First 6 years in America, I worked 6-7 days. 12-13 shifts in a restaurant in Manhattan downtown and saved every penny. Now I have a baby just turn 1 year old and going to work as a real estate broker next month. I want to buy and hold as many house as I can. Thank u again Steve.

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